Acc 291

P14-1

Comparative financial statement data for Douglas Company and Maulder Company, two competitors, appear below. All balance sheet data are as of December 31, 2012, and December 31, 2011. 

Douglas Company            Maulder Company

2012                2011           2012           2011

Net sales                          $1,549,035                         $339,038

Cost of goods sold          1,080,490                           241,000

Operating expenses         302,275                              79,000

Interest expense              8,980                                  2,252

Income tax expense        54,500                                6,650

Current assets                 325,975           $312,410    83,336        $ 79,467

Plant assets (net)             521,310           500,000      139,728      125,812

Current liabilities           65,325             75,815        35,348        30,281

Long-term liabilities      108,500           90,000        29,620        25,000

Common stock, $10 par  500,000           500,000      120,000      120,000

Retained earnings           173,460           146,595      38,096        29,998

Prepare vertical analysis and comment on profitability.

(SO 4, 5)

Instructions

(a) Prepare a vertical analysis of the 2012 income statement data for Douglas Company and Maulder Company in columnar form.

(b) Comment on the relative profitability of the companies by computing the return on assets and the return on common stockholders’ equity ratios for both companies.

P14-2

The comparative statements of Villa Tool Company are presented below.

VILLA TOOL COMPANY

Income Statement

For the Year Ended December 31

2012                2011

Net sales                                           $1,818,500      $1,750,500

Cost of goods sold                            1,011,500        996,000

Gross profit                                      807,000           754,500

Selling and administrative expense 516,000           479,000

Income from operations                   291,000           275,500

Other expenses and losses

Interest expense                                18,000             14,000

Income before income taxes            273,000           261,500

Income tax expense                          81,000             77,000

Net income                                       $  192,000       $  184,500

VILLA TOOL COMPANY

Balance Sheets

December 31

Assets                                                       2012             2011

Current assets

Cash                                                          $ 60,100       $ 64,200

Short-term investments                            69,000          50,000

Accounts receivable (net)                        117,800        102,800

Inventory                                                  123,000        115,500

Total current assets                                  369,900        332,500

Plant assets (net)                                      600,300        520,300

Total assets                                               $970,200      $852,800

Liabilities and Stockholders’ Equity

Current liabilities

Accounts payable                                     $160,000      $145,400

Income taxes payable                               43,500          42,000

Total current liabilities                            203,500        187,400

Bonds payable                                          200,000        200,000

Total liabilities                                         403,500        387,400

Stockholders’ equity

Common stock ($5 par)                           280,000        300,000

Retained earnings                                     286,700        165,400

Total stockholders’ equity                        566,700        465,400

Total liabilities and stockholders’ equity $970,200      $852,800

Compute ratios from balance sheet and income statement.

(SO 5)

Instructions

Compute the following ratios for 2012. (Weighted-average common shares in 2012 were 57,000, and all sales were on account.)

(a)      Earnings per share.

(b)       Return on common stockholders’ equity.

(c)       Return on assets.

(d)       Current.

(e)       Acid-test.

(f)   Receivables turnover.

(g)       Inventory turnover.

(h)       Times interest earned.

(i)   Asset turnover.

(j)        Debt to total assets.

11-1

Indicate whether each of the following statements is true or false.

1.     The corporation is an entity separate and distinct from its owners.

2.     The liability of stockholders is normally limited to their investment in the corporation.

3.     The relative lack of government regulation is an advantage of the corporate form of business.

4.     There is no journal entry to record the authorization of capital stock.

5.     No-par value stock is quite rare today.

E11-15

On October 31, the stockholders’ equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.

Complete the tabular summary of the effects of the alternative actions on the components of stockholders’ equity and outstanding shares. (If answer is zero, please enter 0. Do not leave any fields blank.)

E11-16

Before preparing financial statements for the current year, the chief accountant for Springer Company discovered the following errors in the accounts.

  1. The declaration and payment of $50,000 cash dividend was recorded as a debit to Interest Expense $50,000 and a credit to Cash $50,000.
  2. A 10% stock dividend (1,000 shares) was declared on the $10 par value stock when the market value per share was $16. The only entry made was: Retained Earnings (Dr.) $10,000 and Dividend Payable (Cr.) $10,000. The shares have not been issued.
  3. A 4-for-1 stock split involving the issue of 400,000 shares of $5 par value common stock for 100,000 shares of $20 par value common stock was recorded as a debit to Retained Earnings $2,000,000 and a credit to Common Stock $2,000,000.

Prepare the correcting entries at December 31. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

P11-6A

Arnold Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative preferred stock and 2,000,000 shares of no-par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2011, the ledger contained the following balances pertaining to stockholders’ equity.

Preferred Stock                                                              $240,000

Paid-in Capital in Excess of Par Value-Preferred         56,000

Common Stock                                                              2,000,000

Paid-in Capital in Excess of Stated Value-Common    5,700,000

Treasury Stock-Common (1,000 shares)                       22,000

Paid-in Capital from Treasury Stock                            3,000

Retained Earnings                                                          560,000

The preferred stock was issued for land having a fair market value of $296,000. All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No dividends were declared in 2011.

Prepare the journal entries for the: (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

  1. Issuance of preferred stock for land.
  2. Issuance of common stock for cash.
  3. Purchase of common treasury stock for cash.

Sale of treasury stock for cash.